David Pakmanhttp://www.businessinsider.com/category/david-pakman
en-usSun, 02 Aug 2015 17:05:03 -0400Sun, 02 Aug 2015 17:05:03 -0400The latest news on David Pakman from Business Insiderhttp://static3.businessinsider.com/assets/images/bilogo-250x36-wide-rev.pngBusiness Insiderhttp://www.businessinsider.com
http://www.businessinsider.com/david-pakman-onewire-interview-2014-11One Venrock Partner's Three Keys To Being A Killer Investorhttp://www.businessinsider.com/david-pakman-onewire-interview-2014-11
Fri, 07 Nov 2014 10:10:00 -0500Portia Crowe
<p><iframe width="640" height="360" frameborder="0" src="//fast.wistia.net/embed/iframe/apr5evy63v"></iframe></p>
<p>David Pakman co-created Apple's Music Group and worked for three digital music start-ups before finding his real calling as a venture capitalist.</p>
<p>Now he's a partner at Venrock and has invested in companies like Klout, Dstillery and <span>Dollar Shave Club</span>. But his early entrepreneur experiences shaped those ventures and help him stand out as a star investor in a competitive field.</p>
<p>Pakman sat down with <a href="https://www.onewire.com/">OneWire CEO Skiddy von Stade</a> and gave these three tips on how to best to source deals as a VC based on all he's seen in his career (so quite a bit):</p>
<h3>(1) Develop an area of expertise</h3>
<p>These days investors are chomping at the bit to fund start-up digital media companies&nbsp;— "and everyone’s money’s just as green," Pakman said.</p>
<p>So Venrock capitalists strive to add more than just capital to their ventures.</p>
<p>"Venrock’s been around for more than 40 years and has invested in many of the world’s most incredible companies," Pakman said. "The belief is that we’ve seen this show before and we can offer some guidance to an entrepreneur."</p>
<h3>(2) Get some experience as an entrepreneur</h3>
<p>Not only does Venrock have that kind of expertise, but Pakman does too.</p>
<p>"I’ve started and ran companies, so I’ve seen that grind," he said.</p>
<p>Pakman said new entrepreneurs tend to be short-sighted and focused on the next few weeks or months ahead. So he aims to provide longer-term wisdom to his partners.</p>
<p>"I try to help entrepreneurs see around corners," he said.</p>
<h3>(3) Understand and share your partners' vision — because you're going in for the long haul</h3>
<p>Pakman said entrepreneurs must feel that you see eye to eye with them, sense the same macro trends taking place, and share a long-term vision.</p>
<p>It can take years to get a start-up company where you want it to go.</p>
<p>"So you have to be aligned with the same super long-term vision as an entrepreneur, and I think that’s another way to differentiate," he said.</p>
<p><span>Watch the full OneWire interview above and&nbsp;</span><a href="https://www.onewire.com/videos" target="_blank">subscribe to the series</a><span>&nbsp;to get new interviews as soon as they are posted.</span><span><br><br></span></p><p><a href="http://www.businessinsider.com/david-pakman-onewire-interview-2014-11#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/tv-is-still-screwed-despite-aereo-ruling-2014-6Why TV Is Still Screwed Despite The Aereo Rulinghttp://www.businessinsider.com/tv-is-still-screwed-despite-aereo-ruling-2014-6
Mon, 30 Jun 2014 18:13:00 -0400David Pakman
<h3><strong><img style="float:right;" src="http://static6.businessinsider.com/image/53b1dbd769bedd9f178b456b-480-/youtube-16.jpg" border="0" alt="youtube" width="480" />The First Phase of Disruption Already Started</strong></h3>
<p>There has been a major shift away from appointment TV to on-demand viewing, beginning with the DVR, followed by Netflix, and now partially fulfilled by hundreds of OTT on-demand apps, from HBOGO to Crunchyroll.</p>
<p>The cable&nbsp;networks, of course, only make their programming available OTT if you authenticate with your cable log-in, preserving MVPD economics.</p>
<p>So the only part of the TV ecosystem feeling pressure from this trend is commercial advertising, since, with a few exceptions, the majority of on-demand viewing is commercial free. But this shift to on-demand insures that our kids fully expect all video programming to be portable and on-demand.</p>
<h3><strong>Will there be a cheaper cable bundle?</strong></h3>
<p>With the end of Aereo, it is unlikely we will see bundled economics of cable TV programming disrupted by a tech company outsider. The only way to offer traditional TV programming over the internet will be to license it from its creators or distributors. Those content owners set rates in such a way as to preserve traditional cable bundle economics. Sure, Apple, Google or Amazon could become an MVPD, but they would be unlikely to offer a cheaper or smaller bundle.</p>
<p>There is real pressure on the bundle, however. Remember, cable TV is really a bundle of bundles. If an MVPD wants ESPN, they must also license and pay for ESPN2, ESPN3, ESPNNews, etc. These mini bundles force MVPDs to pay for more channels than they may otherwise want and in turn must charge consumers more.</p>
<p>But they have little choice. Even if you wanted to assemble a smaller, less-expensive bundle of programming, it is made nearly impossible by the imposition of these mini-bundles. And the costs of these mini bundles have been rising, which has led Comcast to buy NBC, Comcast to buy Time-Warner Cable, and now AT&amp;T to buy DirecTV, all as&nbsp;attempts to create leverage against rising mini-bundle costs. This upward price pressure is creating a real problem, since the number of cable subs&nbsp;<a href="http://www.bloomberg.com/news/2014-03-19/u-s-pay-tv-subscriptions-fall-for-first-time-as-streaming-gains.html">is now falling in this country</a>. Rising rates, falling subs.</p>
<p>It is unlikely tech companies will be able to meaningfully change these core economics. For this reason, I believe the core disruptive force acting on traditional TV is coming from outside of the TV ecosystem. It is coming in the form of alternate programming being consumed largely by the youngest demographics. I&rsquo;m talking about YouTube, Twitch.TV and many smaller video companies stealing kids&rsquo; time away from the tube.</p>
<h3><strong>The Second Phase</strong></h3>
<p>YouTube, for many years, was scoffed at by the traditional TV content owners as lacking in quality. But&nbsp;my eleven year old today watches 90% of his video programming on YouTube. CaptainSparkles and Crazy Russian Hacker are true celebrities to him, as big as Kevin Spacey is to me.</p>
<p>With more than&nbsp;<a href="https://www.youtube.com/yt/press/statistics.html">6 billion hours</a>&nbsp;of video watched each month, YouTube today reaches more people than any cable network and, even among adults 18-34, they are bigger than any cable network. Their growth rate continues unabated and in short order, YouTube may one day be bigger than all of traditional TV. By buying Twitch, they cement themselves as the overwhelming largest platform for video game content, one of the two most popular content types among kids. And newer entrants like Livestream and YouNow are building engaged audiences with long tail programming.</p>
<p>This view that TV&rsquo;s competition comes from the bottom is not a new one. (Hunter Walk and I discussed this in&nbsp;<a href="http://www.pakman.com/2012/06/06/the-pressure-on-tv-networks-ari-emmanuel-and-cable-companies/" title="The Pressure on TV Networks, Ari Emmanuel and Cable Companies">this post</a>.) What is new is the widespread shift to mobile devices. As smartphones hit scale, we carry with us both a video creation and consumption device at all times. The real-time web collides with the mobile video web and a new genre of video programming emerges, somewhere between broadcast and messaging.</p>
<p>These new personal video formats will steal even more video viewership away from TV, particularly among youth. So if younger kids grow up consuming video away from TV, and TV&rsquo;s response is continued rising prices of bigger channel bundles, something has to break.</p>
<p><em>David Pakman is a partner at Venrock. He blogs at&nbsp;<a href="http://www.pakman.com/" target="_blank">www.pakman.com</a>.</em></p><p><a href="http://www.businessinsider.com/tv-is-still-screwed-despite-aereo-ruling-2014-6#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/not-all-traffic-is-created-equal-2012-9Facebook's Biggest Source Of Traffic Is Also The Least Monetizablehttp://www.businessinsider.com/not-all-traffic-is-created-equal-2012-9
Tue, 22 Jan 2013 18:11:45 -0500David Pakman
<p><img style="float:right;" src="http://static5.businessinsider.com/image/506318baeab8eafc2d000002-400-300/mark-zuckerberg-facebook.jpg" border="0" alt="mark zuckerberg facebook" width="400" height="300" /></p><p>To build the online media giants of tomorrow, companies need models where the costs of both content and distribution are near zero.</p>
<p><a class="hidden_link" href="http://www.businessinsider.com/blackboard/google">Google</a>, <a class="hidden_link" href="http://www.businessinsider.com/blackboard/facebook">Facebook</a>, <a class="hidden_link" href="http://www.businessinsider.com/blackboard/twitter">Twitter</a>, <a class="hidden_link" href="http://www.businessinsider.com/blackboard/instagram">Instagram</a>, Pinterest and countless others employ this model. These models allow scale to emerge at very low-cost.</p>
<p>And in these particular examples, the scale achieved is astronomical&mdash;on the order of hundreds of millions or billions of users. In thinking through how to build businesses around this scale, a lens emerges: what&nbsp;<em>kind&nbsp;</em>of traffic produces that scale?</p>
<p>In the case of social media companies like Facebook, Twitter, Instagram, Pinterest and <a class="hidden_link" href="http://www.businessinsider.com/blackboard/tumblr">Tumblr</a>, the root activity on the site is the sharing of content. But the content shared on those sites differs widely, particularly around which content attracts the most engagement. Broadly, Facebook attracts photo sharing and light-hearted personal content.</p>
<p>Twitter responds far better to true news and topical information sharing. Tumblr seems to resonate around entertainment and creative media. And Pinterest lights up around home design, apparel, food and other commercial items. (I am taking some liberties by generalizing, but you get the point.)</p>
<p>At the scale of Facebook, you could have your users share almost anything and still be able to build a large business, purely by loading the site up with lots of advertising that is (at very least)&nbsp;rudimentary&nbsp;targeted. At that scale, you can reach billions of dollars in revenue. And I believe, even at their scale, their ad load will need to further increase (along with their targeting abilities) in order to significantly grow the business. (They also must move advertising off-site, as they are now doing, which I detail in <a href="http://www.pakman.com/2010/12/16/how-facebook-reaches-20b-in-revenues/">this post</a>.)</p>
<p>But if your service attracts particular verticals of content engagement, not all content is created equal, and some is much more valuable than others.</p>
<p>I divide traffic/content engagement into three buckets: topical, informational and transactional.</p>
<ul>
<li><strong>Topical content</strong> engagement is what is mostly taking place on Facebook, Tumblr and Twitter. It is comprised of posts generally linking to news, information, family, entertainment, photos, etc. The signal in this stream is the lowest of the three in terms of monetizeable traffic.</li>
<li><strong>Informational content</strong>, often found on sites like SlideShare, <a class="hidden_link" href="http://www.businessinsider.com/blackboard/zillow">Zillow</a> and automotive blogs is the sharing of information that is near the top of the funnel for demand creation. Things like business white-papers or product reviews are perfect examples of informational traffic. This traffic has significantly more value than informational traffic, and excels at attracting endemic advertisers in the key verticals of travel, auto, tech, financial services, real estate and pharma, to name a few. Intent is well understood in this traffic and the signal is strong.</li>
<li><strong>Transactional content</strong> is traffic that is essentially one click away from a purchase. Obviously, traffic found on ecommerce sites is the prime example of this and search traffic is a close second, but increasingly Pinterest is proving itself to be a massive source of high-converting traffic. Here, intent is clear and the signal is strongest.</li>
</ul>
<p>I believe, with the Facebook share price correction, we are entering a period where sites based on topical content traffic are going to struggle in generating value for themselves. Much of the valuations around the consumer web are rationalizing, and because of that, investors are once again focused on understanding business models.</p>
<p>Social media properties building traffic around informational or transactional content will be significantly more valuable than topical ones in this forthcoming period.</p>
<p>This general notion that every social property with scale will be able to create their own custom &ldquo;social ad&rdquo; units and monetize themselves consistent with their earlier valuations, I think, is flawed, unless those properties are in the two higher tiers of content.</p><p><a href="http://www.businessinsider.com/not-all-traffic-is-created-equal-2012-9#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/tim-armstrong-to-startups-heres-a-sure-fire-way-to-not-get-acquired-by-aol-2012-11Tim Armstrong To Startups: Here's A Sure-Fire Way To Not Get Acquired By AOLhttp://www.businessinsider.com/tim-armstrong-to-startups-heres-a-sure-fire-way-to-not-get-acquired-by-aol-2012-11
Thu, 08 Nov 2012 10:28:00 -0500Alyson Shontell
<p><img style="float:right;" src="http://static4.businessinsider.com/image/50356587eab8ea163a00000e-400-300/tim-armstrong-aol.jpg" border="0" alt="tim armstrong aol" /></p><p>This morning, <a href="http://www.businessinsider.com/blackboard/aol" class="hidden_link">AOL</a> CEO <a href="http://www.businessinsider.com/blackboard/tim-armstrong" class="hidden_link">Tim Armstrong</a> spoke at the Ingenuity Conference at New York City's New World Stages.</p>
<p>He told the crowd one thing founders shouldn't do if they want AOL to acquire them: sell shares before the deal goes through.</p>
<p>"Entrepreneurs selling shares before an exit is dangerous and a very bad sign," he said. "We won't acquire them. We need more entrepreneurs who want to build decade-long companies, not build to sell."</p>
<p>One way startups can make themselves more attractive to AOL is to create a brand that's known around the world. "We are more likely to acquire a company if you already have a multi-country presence," he said.</p>
<p><a href="https://twitter.com/pakman">Venrock partner David Pakman</a> is in the crowd at New World Stages, tweeting the conversation. Here are some other notable things Armstrong said this morning, per Pakman's tweets.</p>
<p><img src="http://static1.businessinsider.com/image/509bcef469beddd81f000021-517-380/david-pakman-tim-armstrong-tweets.png" border="0" alt="david pakman tim armstrong tweets" /></p><p><a href="http://www.businessinsider.com/tim-armstrong-to-startups-heres-a-sure-fire-way-to-not-get-acquired-by-aol-2012-11#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/tv-is-losing-viewers-and-will-soon-lose-advertisers-2012-6Ad Revenue Will Start Slipping Away From The TV Industry Sooner Than It Thinkshttp://www.businessinsider.com/tv-is-losing-viewers-and-will-soon-lose-advertisers-2012-6
Thu, 07 Jun 2012 15:08:00 -0400David Pakman
<p><img style="float:right;" src="http://static3.businessinsider.com/image/4fd0f4f769bedd2109000029/broken-tv.jpg" border="0" alt="broken tv" /></p><p>Lots of recent discussion on TV and Hollywood.</p>
<p>Ari Emmanuel <a href="http://allthingsd.com/20120530/ari-emanuel-live-from-d10/?refcat=d10">accuses Google (again)</a> of aiding and abetting pirates. <a href="http://www.businessinsider.com/blackboard/henry-blodget" class="hidden_link">Henry Blodget</a> <a href="http://www.businessinsider.com/tv-business-collapse-2012-6">writes a nice piece</a> on the changing TV viewing habits of consumers. Dan Frommer says those changing habits <a href="http://www.splatf.com/2012/06/tv-industry-collapse/">won&rsquo;t really affect</a> the MSOs and Networks anytime soon. And Jeremie Allaire <a href="http://allthingsd.com/20120604/apple-television-airplay-and-why-the-ipad-is-the-new-tv-apps-platform/?refcat=voices">seems to claim</a> that Apple&rsquo;s next move in TV will be to emulate TiVo&rsquo;s (largely failed) box/cable-card strategy (but correctly points out the disruptive power of <a href="http://www.businessinsider.com/blackboard/airplay" class="hidden_link">AirPlay</a>).</p>
<p>Oh, and <a href="http://www.businessinsider.com/blackboard/sean-parker" class="hidden_link">Sean Parker</a> launched version one of <a href="https://www.airtime.com/">AirTime</a>.</p>
<p>I wanted to add a few points to the discussion about the pressures on the TV industry. First, some basic observations:</p>
<p><strong>TV programming is not homogenous</strong></p>
<p><strong></strong><strong></strong>The uber-bright&nbsp;<a href="http://www.hunterwalk.com/">Hunter Walk</a>&nbsp;provided me with a fascinating view into his opinion of the real tiers of TV programming. Out of the 4-5 hours of TV the average household watches each day, there are essentially three tiers:</p>
<ul>
<li><strong>Hour 1 (No Substitute)</strong>&mdash;This is the never-miss-an-episode, live-sports, must-see-TV that exists across many networks. <em>The Sopranos, Mad Men, Yankees/Red Sox, French Open, Homeland</em>, etc. When we watch TV, this is the first hour we watch. We watch this stuff live or DVR it and try never to miss it. We will pay for it any way we can and even endure roadblocks to watch it (like when networks won&rsquo;t make it available on our preferred viewing device, or expire old episodes, etc.) While the networks believe 80% of their content fits this description, it is probably more like 20% of all shows currently on the air, at most.</li>
<li><strong>Hours 2-3 (Nice to see)</strong>&mdash;This is stuff that we have an allegiance to, but are comfortable missing an episode and won&rsquo;t really endure friction to see it. Many comedies fit this category, from <em>30 Rock</em> to <em>The Simpsons,</em> as well as the countless procedural crime dramas like <em>CSI</em>, etc. The networks think all of this content is in the category above, but it really isn&rsquo;t. And probably another 30% of all shows on the air fit this category.</li>
<li><strong>Hours 4-5 (Filler)</strong>&mdash;This is the low-budget, mostly reality show programming that networks use to fill the time between their one or two hit shows. Think <em>Kate Plus 8</em> or&nbsp;<em>Let&rsquo;s Make a Deal</em> re-runs. The only time you watch this stuff is when you are couch-surfing. This is&nbsp;probably&nbsp;50% of all programming on air.</li>
</ul>
<p>When Ari insists that <a href="http://www.businessinsider.com/blackboard/facebook" class="hidden_link">Facebook</a>, <a href="http://www.businessinsider.com/blackboard/google" class="hidden_link">Google</a>, <a href="http://www.businessinsider.com/blackboard/twitter" class="hidden_link">Twitter</a> and everyone else in tech will have to &ldquo;pay for Aaron Sorkin," he is really talking about the &ldquo;Hour 1&Prime; category of programming. That stuff is really high-value and is not in a lot of danger of being disrupted any time soon (although the rising production costs and off-the-charts no-risk fees paid to talent are surely to be reconsidered in the future.) But as for the other two categories&hellip;</p>
<div><strong>Our attention is shifting away from</strong> <strong>TV</strong>
<p>All media operates in an attention economy. They compete for our attention against the backdrop of thousands of choices as to how we spend our time: email, video games, Facebook, Twitter, <a href="http://www.businessinsider.com/blackboard/flipboard" class="hidden_link">Flipboard</a>, <a href="http://www.businessinsider.com/blackboard/instagram" class="hidden_link">Instagram</a>, etc.</p>
<p>The <a href="http://www.businessinsider.com/uh-oh-new-nielsen-data-says-people-are-turning-away-from-tv-2012-6">latest numbers show</a> those choices are finally catching up with TV; we are watching less of it, whether DVRed or not. We aren&rsquo;t watching less of that incredible No Substitute programming, but we are watching less of the 80% of the other stuff.</p>
<p>And by the way, those big &ldquo;hit&rdquo; shows that Ari talks about have relatively small audiences. Only about <a href="http://www.slate.com/articles/arts/culturebox/2012/03/game_of_thrones_how_hbo_and_showtime_make_money_despite_low_ratings_.html">3 million people</a> &ldquo;tune in&rdquo; for an episode of &ldquo;Game of Thrones&rdquo; and over the course of a week about <a href="http://www.slate.com/articles/arts/culturebox/2012/03/game_of_thrones_how_hbo_and_showtime_make_money_despite_low_ratings_.html">9 million people</a> have seen it through various means. Same for <em>Mad Men</em> (<a href="http://www.washingtonpost.com/blogs/tv-column/post/man-men-scores-most-watched-episode-ever-with-season-5-premiere/2012/03/26/gIQAclhOcS_blog.html">3 million)</a>,&nbsp;<em>Desperate&nbsp;Housewives</em> (<a href="http://www.washingtonpost.com/blogs/tv-column/post/man-men-scores-most-watched-episode-ever-with-season-5-premiere/2012/03/26/gIQAclhOcS_blog.html">9 million</a>) and <em>The Good Wife</em> (<a href="http://www.washingtonpost.com/blogs/tv-column/post/man-men-scores-most-watched-episode-ever-with-season-5-premiere/2012/03/26/gIQAclhOcS_blog.html">9 million</a>).</p>
<p>That&rsquo;s a pretty small audience compared to, say, the 450 million on Facebook every day, the 800 million who watch <a href="http://www.businessinsider.com/blackboard/youtube" class="hidden_link">YouTube</a> <a href="http://www.businessinsider.com/blackboard/" class="hidden_link">videos</a> every month, or the more than 100M people who watched the final episode of M*A*S*H.</p>
<p>As TV and other entertainment choices proliferate, &ldquo;hit&rdquo; audience sizes have&nbsp;decreased. So, one of the immediate threats to network/cable television is that we are likely to watch less and less of the &ldquo;Hours 2-5&Prime; programming that fills so much of their programming grids. (The smart production companies know this and are already producing much lower-cost, quality programming for YouTube and other online-only outlets.) And where will that lead us?</p>
<p><strong>The pressure will first come from the advertisers</strong></p>
<p>If&nbsp;Nielsen&nbsp;didn&rsquo;t <a href="http://www.nytimes.com/2010/12/21/business/media/21adco.html">lie</a> and <a href="http://blog.nielsen.com/nielsenwire/media_entertainment/do-americans-watch-more-dvrd-commercials-than-you-think/">try to convince TV advertiser</a>s that the 50% of people with DVRs still watch commercials (hint: that is utterly ridiculous. We don&rsquo;t watch any commercials anymore unless we watch a live sports event), I believe advertisers would appreciate that we aren&rsquo;t seeing their commercials anymore. While the PC and mobile web still don&rsquo;t offer nearly the great story-telling opportunities for advertisers as TV commercials do, it just doesn&rsquo;t make sense to continue to buy very expensive TV media when no one sees your commercials.</p>
<p>Certainly live sports TV CPMs will go up, but the rest has to fall as advertisers figure this out. And reports detailing that we are watching less TV has to start to sink in. Advertisers would love to try to buy only the hit stuff, but networks are good at bundling to force them to buy the filler programming too. But the whole bundle will start to feel more and more pressure.</p>
<p>The dual revenue stream model of the cable networks provides lots of air cover against decreased ad revenue. The affiliate fees they get for carriage will sustain them for a while. Brand advertisers are looking elsewhere to find places to tell their stories and to reach their audience.</p>
<p>And online, we can target viewers and assemble audiences with drastically better efficiency (and reliability) than on TV. Online video is becoming so performance-based that advertisers now can pay only when someone has actually watched the commercial and not pressed the &ldquo;skip this ad&rdquo; button. If you really care about making sure someone sees your commercial, online is the only place to show it. And more and more, we just aren&rsquo;t seeing the ad on TV anymore.</p>
<p><strong>What&rsquo;s This Mean?</strong></p>
<ul>
<li>Advertisers will begin to spend less on TV and that will be the canary in the coal mine that big changes are afoot</li>
<li>We will continue our shift away from viewing traditional TV and towards IP-delivered unbundled shows, some which will have migrated from traditional TV, but many that will be organic and native to internet programming (the made for YouTube stuff is a prime example here.)</li>
<li>Ari will continue to demand high prices for the &ldquo;Hour 1&Prime; shows created by his elite clients, but the audiences for those shows will grow smaller and smaller.</li>
<li>As a result, networks will begin to feel the pinch of decreased advertiser spending, and they will try to raise carriage prices to the MSOs more&nbsp;aggressively</li>
<li>MSOs will keep trying to push our bundled TV prices up higher as a result of this, pushing more and more of us away and into other IP-delivered options</li>
<li>Finally, I believe the as more of us watch IP-delivered programming, the lure of certainty that the audience you really care about is seeing your ads will prove appealing to more and more advertisers, and online video ad revenues will continue a dramatic ascent</li>
<li>And so the cycle will go</li>
</ul>
<p>(Update: <a href="http://www.businessinsider.com/future-of-tv-business-2012-6">this report</a> from Pivotal Research refutes all of Henry&rsquo;s points&hellip;but bases all of its observations on data provided from a single and biased vendor:&nbsp;Nielsen &ndash; a panel-based research method that looks at activities of only 25,000 households &ndash; and has concluded, for one, that those of us with DVRs still watch ads. Go figure. Oh, they make their money from the TV industry.)</p>
</div><p><a href="http://www.businessinsider.com/tv-is-losing-viewers-and-will-soon-lose-advertisers-2012-6#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/amazon-is-right-ebooks-should-only-cost-10-2012-4Amazon Is Right, There's No Way E-Books Should Cost $15 (AMZN)http://www.businessinsider.com/amazon-is-right-ebooks-should-only-cost-10-2012-4
Mon, 16 Apr 2012 11:39:41 -0400David Pakman
<p><img style="float:right;" src="http://static5.businessinsider.com/image/4e83733c69bedda84a000001-393-285/jeff-bezos-best-selling-e-reader.jpg" border="0" alt="jeff bezos best selling e reader" width="393" height="285" /></p><p>Last week&rsquo;s announcement by the Justice Department that they are suing <a class="hidden_link" href="http://www.businessinsider.com/blackboard/apple">Apple</a> and several of the world&rsquo;s biggest book publishers for conspiring to keep eBook prices high generated plenty of media coverage. One challenge in wading through this&nbsp;<a href="http://www.nytimes.com/2012/04/16/business/media/amazons-e-book-pricing-a-constant-thorn-for-publishers.html?_r=1&amp;ref=business">coverage</a>&nbsp;is that most of it tends to be written by&hellip;journalists. And some journalists are also authors. And authors seem to have a&nbsp;<a href="http://www.nytimes.com/2012/04/16/business/media/amazon-low-prices-disguise-a-high-cost.html?ref=business">soft spot</a>&nbsp;for publishers who fight for higher prices. So, we get lots of coverage sympathetic to the plight of the poor book publishers. <a class="hidden_link" href="http://www.businessinsider.com/blackboard/amazon">Amazon</a> is evil, you see.</p>
<p>Absent from most of this coverage are two main questions: a) what is the right price for eBooks and who gets to set it, and b) why are eBooks not interoperable on different devices? These questions, in my mid, are far more interesting than the ongoing struggle of publishers to adapt to Amazon&rsquo;s dominance in book retailing. In fact, the answers can significantly help legacy publishers stay competitive for the future and avoid extinction.</p>
<h2><strong>eBook Pricing</strong></h2>
<p>First, a conversation about eBook pricing. Readers of this blog are familiar with my many discussions on digital good pricing and&nbsp;<a href="http://www.pakman.com/2010/03/19/the-music-industry-admits-music-is-an-elastic-good/">price elasticity</a>. There&rsquo;s &ldquo;<a href="http://www.pakman.com/2010/02/03/wading-in-on-amazonmacmillan-pricing-debate/">Weighing In On the Amazon/Macmillan Pricing Debate</a>&rdquo; where I detail that the market can tell you your optimal (i.e., highest profit producing) price for digital goods. Each incremental digital good has no additional cost. The marginal cost of distributing it is zero. So you really want to maximize total profit by finding the price that produces the most number of copies sold. In these markets, you make a mistake when you set your price by looking at your legacy costs (which were designed for a physical goods market in pre-digital times). Digital markets produce much lower profit per item, since digital markets tend to have lower prices for goods. (See &ldquo;<a href="http://www.pakman.com/2012/01/16/as-big-media-goes-digital-markets-shrink/">As Big Media Goes Digital, Markets Shrink</a>&ldquo;.)</p>
<p>In all the discussions about why book publishers demand that eBooks should be $15 and not $10, they say it is because they cannot&nbsp;<em>afford</em>&nbsp;to sell books at $10. That is, they cannot cover their legacy cost models on that number. Right. Which is why you must rebuild your cost structure for a digital goods industry with far lower prices. You start by paying your top execs much less than millions of dollars a year. Then you move your offices out of fancy midtown office buildings. Why should eBooks cost $15? Amazon is far more of an expert on optimal book pricing. They have far more data than publishers, since they experiment with pricing hundreds of thousands of times a day across millions of titles. Amazon can tell you the exact price for a title that will produce the most number of copies sold. Amazon is pretty sure that number is closer to $10 than to $15.</p>
<p>Yes, they want to sell more Kindles. And they believe that lower eBook prices mean more eBooks sold which means more demand for <a class="hidden_link" href="http://www.businessinsider.com/blackboard/kindle">Kindle</a>. The negative coverage of Amazon is centered on them selling eBooks&nbsp;<em>below cost</em>&nbsp;in order to reach the $10 price point. But that is a function of publishers setting the cost&nbsp;<em>higher</em>than $10. If the profit-maximizing price for an eBook is $10, then publishers must adapt to set a wholesale price&nbsp;<em>lower</em>&nbsp;than that, even if it means your legacy cost structure doesn&rsquo;t allow it. And that&rsquo;s the rub. [By the way, as publishers continue to resist this market force, new "publisher" models are appearing and will replace the traditional functions of publishers with more digital-friendly models.]</p>
<h2><strong>Openness and Interoperability</strong></h2>
<p>Now, how do legacy book publishers fight back? Well, to begin, their biggest mistake prior to over-reaching on pricing was to&nbsp;<a href="http://www.techdirt.com/articles/20120412/07212918466/another-reason-why-drm-is-bad-publishers.shtml">insist retailers DRM their eBook titles</a>. Just like in online music, this insistence on anti-copying protection (albeit with limited usefulness) not only creates inconveniences for consumers, it allows for dominant proprietary ecosystems to form (like Apple did with iPod/iTunes, where tracks bought from <a class="hidden_link" href="http://www.businessinsider.com/blackboard/itunes">iTunes</a> only played on iPods, Kindle books can only be read on Kindles.) Instead, publishers should have demanded the opposite. All eBooks should be sold in open, interoperable formats, so an eBook sold at Amazon could be read on a <a class="hidden_link" href="http://www.businessinsider.com/blackboard/nook">Nook</a>, etc. This would have separated the reader market from the retail market and lessened Amazon&rsquo;s eBook dominance. It may be too late for this change to work, but it is worth exploring. Incidentally, I predicted this in 2009 with this piece, &ldquo;<a href="http://www.pakman.com/2009/10/04/the-book-industry-is-in-trouble-but-piracy-is-just-a-symptom/">The Book Industry Is In Trouble, But Piracy Is Just A Symptom</a>.&rdquo;</p>
<p>Here&rsquo;s the essence of what I see &mdash; we have authors and publishers screaming that Amazon wants to sell their books at prices lower than the arbitrary costs the authors and publishers have set. But why must eBook prices be $15? What is so magical about that price? Will it maximize profit? I am skeptical that this price does optimize profit. I see how it attempts to protect a legacy cost structure that is out-of-whack with a digital goods market. Yes, Amazon is a relentless competitor. But they always seem to be on the side of lower prices. And as consumers, we love this about Amazon. But none of the articles I have read seem to mention that the winner in a lower-price eBook market is the person authors are all writing books for in the first place. The reader.</p>
<p>(Incidentally, I am&nbsp;completely&nbsp;unmoved by the argument that if Amazon forces traditional publishers to sell books at lower costs, then the publishers will go away and we won&rsquo;t have books anymore. Hogwash. The publishers built for a printed books world may go away, but their digital native versions will replace them.)</p>
<p><em>This <a href="http://www.pakman.com/2012/04/16/why-should-ebooks-cost-15/">post</a> was originally published at <a href="http://www.pakman.com/">Pakman.com</a></em></p><p><a href="http://www.businessinsider.com/amazon-is-right-ebooks-should-only-cost-10-2012-4#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/old-business-giants-think-they-can-keep-tech-startups-from-innovating-2012-1Old Business Giants Think They Can Keep Tech Startups From Innovatinghttp://www.businessinsider.com/old-business-giants-think-they-can-keep-tech-startups-from-innovating-2012-1
Wed, 25 Jan 2012 15:50:00 -0500David Pakman
<div class="meta"><em><img style="float:right;" src="http://static1.businessinsider.com/image/4b85add77f8b9ae42c220000/cigar-boys-club.jpg" border="0" alt="cigar-boys-club" />This&nbsp;<a href="http://www.pakman.com/2012/01/25/wither-the-giants-the-arrogance-of-aging-incumbents/" target="_blank">work</a>, from&nbsp;<a href="http://www.pakman.com/" target="_blank">David Pakman's Blog</a>, is licensed under a&nbsp;<a href="http://creativecommons.org/licenses/by/3.0/">Creative Commons Attribution 3.0 Unported License</a>.</em></div>
<p class="title">My friend and former colleague&nbsp;<a href="http://www.nbcuni.com/corporate/management/executives/nbc-owned-television-stations/greg-scholl">Greg Scholl&nbsp;</a>sent me an article this week and a provocative quote jumped out of it.</p>
<p class="title">Here is the view of Irwin Gotlieb, CEO of one the largest global advertising agencies on the planet, as he shared his view on this year&rsquo;s CES.</p>
<p class="title">Given last week&rsquo;s SOPA/PIPA debate, I thought Mr. Gotlieb&rsquo;s observations were worth elevating, as they effectively capture a way of thinking that ultimately undermines incumbent media companies and the businesses that serve them:</p>
<div class="entry">
<div class="woo-sc-quote boxed">
<p style="padding-left: 60px;">Much of what we saw at CES relates to things we&rsquo;ll be seeing 24 months out. In my mind, it&rsquo;s all good: we&rsquo;ll be able to target better, we&rsquo;ll be able to segment better. The ads will be delivered on screens that are sharper, look better, larger, which ultimately provides more effective communication.</p>
<p style="padding-left: 60px;">There&rsquo;s one last element: in the role that we [media buyers] play, we have a responsibility to ensure that technology develops in a manner that doesn&rsquo;t shake up the supply-and-demand equation of our business, doesn&rsquo;t destroy the content amortization business, isn&rsquo;t disruptive simply for the sake of being disruptive.</p>
<p style="padding-left: 60px;">If it does alter the supply-and-demand equation, it needs to do so positively, not negatively. When you have the share of the deal volume that we do, you can&rsquo;t just be passive about it. You have to try and influence it. The technologies and devices that begin to get manifested at a trade show like this needs to be guided, so that it all works out in the best interests of our clients.</p>
<p style="padding-left: 60px;">-&nbsp;<a href="http://www.groupm.com/irwin-gotlieb" target="_blank">Irwin Gotlieb</a>, Global CEO, GroupM</p>
</div>
<p><strong><em>We have a responsibility to ensure that technology develops in a manner that doesn&rsquo;t shake up the supply-and-demand equation of our business.</em></strong><strong></strong></p>
<p>A bold statement and, it seems, a common mindset for many incumbent business giants in their respective industries; a mistaken belief that they can somehow coax disrupting forces (be they new companies, or larger macro consumer trends) into conforming to their legacy business models and cost structures. As we have seen countless times, the actions of incumbents, when faced with technology disruption, often is to turn to litigation, legislation or other non-market strategies (i.e., anti-trust investigations, artificial price barriers) in an attempt to delay or block the challenging technology or companies. This perhaps work as a delaying tactic in the short term (<a href="http://museumofintellectualproperty.eejlaw.com/exhibits/rio.html">Rio MP3</a>&nbsp;player case, <a href="http://www.businessinsider.com/blackboard/napster" class="hidden_link">Napster</a>, book publishing agency pricing model with <a href="http://www.businessinsider.com/blackboard/amazon" class="hidden_link">Amazon</a>) but fails in the long term.</p>
<p>Mr. Gotlieb&rsquo;s apparent belief that he and other advertising agency leaders can &ldquo;ensure that technology develops in a manner that doesn&rsquo;t shake up the supply-and-demand equation of our business&rdquo; is futile in the long run but perhaps more pernicious is the implicit arrogance of thinking the market force of the web can be channeled into their bank accounts by sheer force of will.</p>
<p>Of the many problems with this way of thinking, paramount is the ability to rationalize away making the hard choices and decisive actions to ensure the Group M&rsquo;s of the world play a vital role in the new economy as they have done in the legacy one. (Cue Scotty from Star Trek&hellip;) &ldquo;You cannot change the laws of physics.&rdquo; For Group M and other incumbents, it&rsquo;s almost difficult to fathom, given how entrenched and advantaged they are, that they could drop the ball. But, many will, as history has shown over and over again in times of market transformation.</p>
<p>Technology forces which bring greater efficiency and transparency to markets simply don&rsquo;t care about privilege, access, and rolodexes. They disrupt predecessor markets because of structural problems like price opaqueness and false scarcity that no longer &ldquo;work&rdquo; in the new market. Look at <a href="http://www.businessinsider.com/blackboard/google" class="hidden_link">Google</a>: their entire approach to advertising is to ultimately&nbsp;<em>remove</em>&nbsp;the middle man just as increasingly, the media buying side of traditional agencies&nbsp;<em>is</em>&nbsp;the inefficient middle man, marketing up the cost of media to provide their services. Google is now selling $40B of media every year, the majority of it without a middle man (or at least with different sort of middle man &hellip; and in any case, getting far lower margins than traditional media bought by agencies.)</p>
<p>We watched as the music industry delayed their demise by suing Rio, Napster, and literally hundreds of others, delaying adoption of new business models not based on scarcity. We listen to<a href="http://www.pakman.com/2010/12/15/jeff-bewkes-empty-netflix-threats/">&nbsp;Jeff Bewkes decry Netflix</a>&nbsp;as the Albanian Army as he feverishly works to reduce their influence with his content. We observe the movie industry fight with everything they have to protect the windowing strategy and defend limited access to content instead of move towards open and immediate paid access to their movies. (Fantastic post on this from Rich Greenfield&nbsp;<a href="http://www.btigresearch.com/2012/01/18/dear-rupert-and-the-movie-industry-accept-the-problems-of-technology-and-innovate-dont-legislate/">here, &ldquo;Innovate Don&rsquo;t Legislate&rdquo;</a>.)</p>
<p>And, as a microcosm of this larger conversation, we watched, over a very short period of time in the SOPA/PIPA debate, as the web demonstrated the disruptive advantages of network effects and scale, as over a period of weeks, legislation that appeared all but ratified was shuttered, up to and including an implied Presidential veto. Heady stuff. Granted, if we extend the metaphor and use SOPA/PIPA as a microscope, there are extremes on both sides, and it will be messy and require compromise if the big media incumbents and new technology disruptors are to learn how to co-exist.</p>
<p>For big media companies and the service businesses that cater to them, this means recognizing the practical realities of changed business models &ndash; probably mostly that their cost of production needs to drop dramatically and they need fundamentally to re-think distribution and customer relationship management to remain profitable and relevant.</p>
<p>On the tech side, it means recognizing that progress requires some level of institutional engagement and political compromise &ndash; because like it or not, this is the way our system of government works and how laws get written. This won&rsquo;t be easy or natural, as it&rsquo;s anathema to the culture of how new media tech and the startups that encompass it conceptualize and operate in our worlds. Facing reality and then demonstrating a bit more collaboration and compromise, however, would go a long way and be better for the customer, who, like our democracy, these industries ultimately serve. Because it&rsquo;s the customer who is in the driver&rsquo;s seat, and increasingly,&nbsp;<a href="http://www.edelmandigital.com/2012/01/24/trust-shifts-from-institutions-to-individuals/">they know it</a>.</p>
<p>Perhaps it&rsquo;s Pollyanna, but if so, my chips go on technology. Big media has the most to lose because after decades of the game being rigged in their favor, increasingly, it&rsquo;s the opposite. Of course it is difficult and painful for media incumbents to embrace digital markets considering these markets ultimately are&nbsp;<a href="http://www.pakman.com/2012/01/16/as-big-media-goes-digital-markets-shrink/">smaller and have less attractive economics</a>. That&rsquo;s presumably why big media executives are so well compensated &ndash; if it was easy, anyone could do it. The alternative, however, is to be disrupted by new entrants which don&rsquo;t have any allegiance to aging business models and who could care less how out of whack someone else&rsquo;s cost structure is.</p>
<p>Coming back to Mr. Gotlieb&rsquo;s view, I offer these thoughts. First, incumbents won&rsquo;t be able to meaningfully guide the technology juggernaut of more efficient advertising mechanisms, so it&rsquo;s perhaps better for them to focus their energies and advantages towards thoughtful reinvention. New technologies are bringing actual measurable performance and more efficient means of buying to a large share of advertisers. The challenge for incumbents is to adapt their enterprise to embrace this chaos and profit from it. The good news is, it&rsquo;s doable. However, to think they can bluster their way out of this disruption is a fool&rsquo;s errand.</p>
</div><p><a href="http://www.businessinsider.com/old-business-giants-think-they-can-keep-tech-startups-from-innovating-2012-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/why-i-invested-in-klout-2012-1Why I Invested In Klouthttp://www.businessinsider.com/why-i-invested-in-klout-2012-1
Wed, 04 Jan 2012 09:10:00 -0500David Pakman
<p><a href="http://marissacampise.posterous.com/" target="_blank"><img style="float:right;" src="http://static4.businessinsider.com/image/4f046e2b6bb3f7847300000a/david-pakman-venrock.jpg" border="0" alt="david pakman venrock" />Marissa</a> and I are pleased to discuss our latest investment (and our first one as a team). We are excited to join with fellow firms <a class="hidden_link" href="http://www.businessinsider.com/blackboard/kleiner-perkins">Kleiner Perkins</a> and <a class="hidden_link" href="http://www.businessinsider.com/blackboard/ivp">IVP</a> in investing in the internet&rsquo;s standard for measuring influence, <a href="http://www.klout.com/" target="_blank">Klout</a>. As the internet moves from pages to people, <a href="http://klout.com/#/joefernandez" target="_blank">Joe Fernandez</a>&lsquo;s vision of the need for &ldquo;Pagerank for People&rdquo; is spot on. Klout&rsquo;s algorithms score the actual influence of people as they share on the social web. They attempt to measure your influence by observing interactions on the social web. As we all work to build and manage our online identity and profile, Klout helps measure our reach and topics of influence.</p>
<p>In every other mass media, measurement provides a benefit to the advertisers who subsidize that media. Large companies have emerged based on, frankly, less than perfect measurements systems. In TV and radio, panel-based inference measurement somehow have passed as a legitimate way for advertisers to make decisions on where to spend billions in advertising. These incumbent measurement firms became standards for measurement within their domains. Klout has the benefit of being able to measure actual data, not inferred data. They aim to score the entire social web. They currently have scored more than 300 million users and are scoring and re-scoring a mind-boggling amount every day. With more than one billion people on the social web today, they are by no means complete. Nor are their algorithms perfected. Just as <a class="hidden_link" href="http://www.businessinsider.com/blackboard/google">Google</a> changes their PageRank algorithms hundreds of times a year, Klout will evolve their data science as the social web changes to provide the most accurate influence scoring on the web.</p>
<p>Klout has the distinction of being one of the few companies whose monetization plans actually benefit its users. Using Klout to identify influencers in particular topics, brands offer new products or special &ldquo;<a href="http://klout.com/corp/perks" target="_blank">Klout Perks</a>&rdquo; to you in the hope that you will like them and share your point of view with friends and followers. This relationship, unlike interrupt-driven advertising, benefits both parties. Klout has worked with more than 100 brands like <a class="hidden_link" href="http://www.businessinsider.com/blackboard/starbucks">Starbucks</a>, Audi, <a class="hidden_link" href="http://www.businessinsider.com/blackboard/spotify">Spotify</a> and <a class="hidden_link" href="http://www.businessinsider.com/blackboard/microsoft">Microsoft</a> and has hundreds more lined up to do the same. Joe speaks infectiously about his plans for taking Klout to &ldquo;the real world&rdquo;. He imagines restaurants knowing your Klout score when you call to reserve a table, airlines printing your Klout score on your boarding pass, and of course call centers knowing your Klout score when you call to complain. Already hotels are using your Klout score when you check in to decide upgrade policies.</p>
<p>Aside from this exciting vision and stellar progress, two other themes draw us to Klout. One, we hold a passion around seeing the relationship between a brand and a customers changed. We believe that the social web requires brands to respect us more. To take our point of view more seriously. To adopt policies consistent with good service and fair treatment. No human should have to sit on a plane for seven hours on the tarmac, of course. But also, utility companies should be held accountable for poor service, cable companies should be held accountable when we stay home from work for a day and the repair crew never shows up. Banks should be called out for imposing hidden fees in the dark of the night. And finally, our governments and elected officials should hear from more of us more often. In this age of <a href="http://www.slideshare.net/iglassbox/kpcb-internet-trends-2011-9805325/36" target="_blank">declining influence of traditional media</a>, Klout enables our individual voices to be more influential with institutions who hold power. That is exciting to us.</p>
<p>And finally, Klout supports our view that we are shifting from an attention economy to a data economy. The last ten years of digital media on the web have been built on attention. Those web properties that amassed our attention (generally by stealing our eyeballs away from traditional media) and reached scale have been rewarded with great businesses. <a class="hidden_link" href="http://www.businessinsider.com/blackboard/yahoo">Yahoo</a>! got our attention with email. Google got our attention with great search. <a class="hidden_link" href="http://www.businessinsider.com/blackboard/facebook">Facebook</a> gets our attention with photo sharing. We believe the next ten years will be built around data, and in particular, social data. We have invested in M6D for its leadership in social ad targeting. We invested in Singly for its leadership in building a social data locker and app platform. And now we are investors in Klout for its leadership in social influence measurement. We salute Joe and his team for amazing progress so far, and are pleased to be along for the ride.</p><p><a href="http://www.businessinsider.com/why-i-invested-in-klout-2012-1#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/leaked-at-ignition-a-new-investor-in-klouts-monstrous-round-2011-11LEAKED AT IGNITION: A New Investor In Klout's Monstrous Roundhttp://www.businessinsider.com/leaked-at-ignition-a-new-investor-in-klouts-monstrous-round-2011-11
Wed, 30 Nov 2011 18:21:00 -0500Alyson Shontell
<p><img style="float:right;" src="http://static6.businessinsider.com/image/4deff378ccd1d59417170000/david-pakman3.jpg" border="0" alt="David Pakman3" /></p><p>A few weeks ago, we reported some Klout scuttlebutt.</p>
<p>We heard <a href="http://www.businessinsider.com/klout-raises-30-million-kleiner-perkins-200-million-valuation-2011-10">Klout raised ~ $30 million in its latest round at a valuation that's rumored to be as high as $200 million</a>.&nbsp; We heard from a source with "90% certainty" that <a class="hidden_link" href="http://www.businessinsider.com/blackboard/kleiner-perkins">Kleiner Perkins</a> led the round with participation from <a class="hidden_link" href="http://www.businessinsider.com/blackboard/ivp">IVP</a>.</p>
<p>Today at Ignition, <a class="hidden_link" href="http://www.businessinsider.com/blackboard/venrock">Venrock</a> partner David Pakman announced that his firm had invested in Klout.&nbsp; When we asked for more details Pakman replied, "All I can tell you is that you missed Venrock (me and Marissa) [in your initial report]. Can't talk about other specifics but more news coming!"</p>
<p>Klout was founded in 2008 by Joe Fernandez and Binh Tran. It previously raised $10 million from Kleiner Perkins, Greycroft Partners, ff Asset Management and angel investors.</p>
<p>We're told the big excitement around Klout is its vision to become like people's credit scores for the web.</p><p><a href="http://www.businessinsider.com/leaked-at-ignition-a-new-investor-in-klouts-monstrous-round-2011-11#comments">Join the conversation about this story &#187;</a></p> http://www.businessinsider.com/david-pakman-values-social-data-targeting-2011-6David Pakman: There Are Huge Investment Opportunities In Social Data Targetinghttp://www.businessinsider.com/david-pakman-values-social-data-targeting-2011-6
Tue, 14 Jun 2011 17:47:00 -0400Simone Foxman
<p>As the web is becoming more and more social, we are leaving personal preferences all over the Internet.</p>
<p>This personal information is gold and few have figured out how to gather and manage it all, says David Pakman, a partner at Venrock. Pursuing investments in companies that are using social data for the basis of their value creation is the way to go, says Pakman, who is an investor in socially targeted advertising startup Media6Degrees.</p>
<p>Watch below as Pakman talks about how social travel and social recommendation platforms will become key to online commerce and could possibly be disruptive to the incumbents.</p>
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<p><em>Produced By: Kamelia Angelova &amp; Simone Foxman</em></p>
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Tue, 26 Oct 2010 13:58:48 -0400David Pakman
<p><img style="float:right;" src="http://static1.businessinsider.com/image/4b60b1af00000000007d20d9/reed-hastings-with-dvds.jpg" border="0" alt="Reed Hastings with DVDs" /></p><p>Very few digital media upstarts have been able to build scale businesses in online entertainment. No startup has succeeded at scale in digital music (with only Apple and, barely, Amazon registering any level of success &mdash; these are hardly startups). In online video, clearly YouTube reached scale (but had no meaningful business) when it was acquired by Google and now, with Google&rsquo;s help, will clearly reach scale as a business. In online movies/TV, of the &ldquo;Five Guys&rdquo; who seem poised to be meaningful (Apple, Google, Microsoft, Amazon and Netflix), only one is a startup, and it sure is an outlier. And an amazing outlier they are.</p>
<p>In examining how Netflix successfully navigated the perils of licensed entertainment content businesses, important and familiar lessons emerge.</p>
<p>The movie studios wanted Netflix dead. They hated the model from the beginning. Only problem was, they couldn&rsquo;t kill them. Thanks to the first sale doctrine, <a href="http://www.copyright.gov/title17/92chap1.html#109">codified in copyright law</a>, a lawfully purchased DVD could be rented. So, when many of the studios didn&rsquo;t want to play ball with Netflix and offer them discounts (or even wholesale pricing) on DVDs, Netflix just went to the store to buy them at retail. This allowed Netflix to get off the ground and assess market demand for their DVD-by-mail rental business without any approval or licenses from rights holders. CEO Reed Hastings&rsquo; gut proved right &mdash; a more consumer-friendly model of no late fees and big selection overpowered the immediate convenience of going to a corner store to pick up a movie for a night. He offered a better service for consumers against the strong will of the rights holders. And by building a great product, he was rewarded with massive consumer adoption. There are more than 15MM subscribers today, and growing.</p>
<p>Many analysts predicted the death of Netflix as the world shifted from DVD viewing to on-demand streaming. It wasn&rsquo;t that people believed Netflix couldn&rsquo;t develop a compelling streaming service. Many of us thought Netflix would whither because the studios/networks would never license them content on reasonable terms. There is no first sale doctrine in digital goods, so Netflix could not get into the streaming business without negotiating painful voluntary licenses with each rights holder. The studios had begun licensing services like Amazon&rsquo;s Unbox, Apple and Microsoft with limited titles loaded with consumer unfriendly restrictions and pricing (movies can be rented for $3.99 or $4.99, must be watched within 30 days, and once started, will expire and become unwatchable after 24 hours!) Reed Hastings, with 15MM subscribers and growing knew those terms were largely a non-starter with the mass market. He had built a huge business based on customer convenience &mdash; pay once a month, watch as many movies as you can, and NO restrictions! Keep a movie as long as you want!</p>
<p>So, it seems Netflix could either stay out of the streaming business <em>or</em> license limited content like everyone else with lots of restrictions. And this is where Netflix beat the odds. They knew the two main weaknesses of studios and networks: (1) big money talks &mdash; they are motivated by short-term profit and (2) the profit participants (directors, actors, writers, showrunners) will exert pressure when big offers are put in front of studios/networks.</p>
<p>As Netflix grew in size, an interesting thing happened &mdash; they were massive patrons of the postal service by spending a few billion dollars a year on postage. They reasoned they could simply shift that expense to content owners and have as good or better a business. When they waived a $1B check in front of the studios eyes, suddenly all those restrictions on pricing and limited viewing went away. Netflix used some great negotiating savvy to offer really big numbers to studios in total, but also big per-episode and per-movie-title guarantees. This allowed the profit participants to put pressure on the studios/networks to take the deal. Because Netflix can influence the shows we watch, they can afford to overpay on a per episode basis for hit shows to help with customer acquisition, but can steer us to lower-cost programming once we become members.</p>
<p>In short, Netflix developed great economic leverage with the rights owners &mdash; and that is the only way to force them to do deals that allow both customers to be delighted and also leave enough margin for startups to build a business. Without the first sale doctrine, however, Netflix never would have gotten there. And once they got leverage, they played their cards perfectly.</p>
<p><em>David Pakman is a partner at Venrock and was previously CEO of eMusic. This <a href="http://dpakman.wordpress.com/2010/10/26/why-netflix-won/">article</a> originally appeared at the <a href="http://dpakman.wordpress.com">author's blog</a> and is republished here with permission. </em></p><p><a href="http://www.businessinsider.com/why-netflix-won-2010-10#comments">Join the conversation about this story &#187;</a></p>